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Enhanced capital-asset pricing model for the reconstruction of bipartite financial networks

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Listed:
  • Tiziano Squartini
  • Assaf Almog
  • Guido Caldarelli
  • Iman van Lelyveld
  • Diego Garlaschelli
  • Giulio Cimini

Abstract

Reconstructing patterns of interconnections from partial information is one of the most important issues in the statistical physics of complex networks. A paramount example is provided by financial networks. In fact, the spreading and amplification of financial distress in capital markets is strongly affected by the interconnections among financial institutions. Yet, while the aggregate balance sheets of institutions are publicly disclosed, information on single positions is mostly confidential and, as such, unavailable. Standard approaches to reconstruct the network of financial interconnection produce unrealistically dense topologies, leading to a biased estimation of systemic risk. Moreover, reconstruction techniques are generally designed for monopartite networks of bilateral exposures between financial institutions, thus failing in reproducing bipartite networks of security holdings (\eg, investment portfolios). Here we propose a reconstruction method based on constrained entropy maximization, tailored for bipartite financial networks. Such a procedure enhances the traditional {\em capital-asset pricing model} (CAPM) and allows to reproduce the correct topology of the network. We test this ECAPM method on a dataset, collected by the European Central Bank, of detailed security holdings of European institutional sectors over a period of six years (2009-2015). Our approach outperforms the traditional CAPM and the recently proposed MECAPM both in reproducing the network topology and in estimating systemic risk due to fire-sales spillovers. In general, ECAPM can be applied to the whole class of weighted bipartite networks described by the fitness model.

Suggested Citation

  • Tiziano Squartini & Assaf Almog & Guido Caldarelli & Iman van Lelyveld & Diego Garlaschelli & Giulio Cimini, 2016. "Enhanced capital-asset pricing model for the reconstruction of bipartite financial networks," Papers 1606.07684, arXiv.org, revised Sep 2017.
  • Handle: RePEc:arx:papers:1606.07684
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    Cited by:

    1. Ramadiah, Amanah & Caccioli, Fabio & Fricke, Daniel, 2020. "Reconstructing and stress testing credit networks," Journal of Economic Dynamics and Control, Elsevier, vol. 111(C).
    2. Wang, Chao & Liu, Xiaoxing & Chen, Boyi & Li, Menyu, 2023. "Topological properties of reconstructed credit networks and banking systemic risk," The North American Journal of Economics and Finance, Elsevier, vol. 66(C).
    3. Chao, Wang & Jing, Ma & Xiaoxing, Liu, 2023. "Optimizing systemic risk through credit network reconstruction," Emerging Markets Review, Elsevier, vol. 57(C).
    4. Li, Yan & Jiang, Xiong-Fei & Tian, Yue & Li, Sai-Ping & Zheng, Bo, 2019. "Portfolio optimization based on network topology," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 515(C), pages 671-681.
    5. Pang, Raymond Ka-Kay & Veraart, Luitgard Anna Maria, 2023. "Assessing and mitigating fire sales risk under partial information," Journal of Banking & Finance, Elsevier, vol. 155(C).
    6. Ramadiah, Amanah & Caccioli, Fabio & Fricke, Daniel, 2019. "Reconstructing and stress testing credit networks," LSE Research Online Documents on Economics 118938, London School of Economics and Political Science, LSE Library.
    7. Pang, Raymond Ka-Kay & Veraart, Luitgard A. M., 2023. "Assessing and mitigating fire sales risk under partial information," LSE Research Online Documents on Economics 120171, London School of Economics and Political Science, LSE Library.
    8. Sadamori Kojaku & Giulio Cimini & Guido Caldarelli & Naoki Masuda, 2018. "Structural changes in the interbank market across the financial crisis from multiple core-periphery analysis," Papers 1802.05139, arXiv.org.
    9. Tiziano Squartini & Guido Caldarelli & Giulio Cimini & Andrea Gabrielli & Diego Garlaschelli, 2018. "Reconstruction methods for networks: the case of economic and financial systems," Papers 1806.06941, arXiv.org.
    10. Martijn Boermans, 2022. "A literature review of securities holdings statistics research and a practitioner’s guide," Working Papers 757, DNB.
    11. Giansante, Simone & Manfredi, Sabato & Markose, Sheri, 2023. "Fair immunization and network topology of complex financial ecosystems," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 612(C).
    12. Ladislav Kristoufek & Paulo Ferreira, 2018. "Capital asset pricing model in Portugal: Evidence from fractal regressions," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 17(3), pages 173-183, November.
    13. Andrea Bacilieri & Pablo Austudillo-Estevez, 2023. "Reconstructing firm-level input-output networks from partial information," Papers 2304.00081, arXiv.org.
    14. Mika J. Straka & Guido Caldarelli & Tiziano Squartini & Fabio Saracco, 2017. "From Ecology to Finance (and Back?): Recent Advancements in the Analysis of Bipartite Networks," Papers 1710.10143, arXiv.org.
    15. Jeroen van Lidth de Jeude & Riccardo Di Clemente & Guido Caldarelli & Fabio Saracco & Tiziano Squartini, 2019. "Reconstructing Mesoscale Network Structures," Complexity, Hindawi, vol. 2019, pages 1-13, January.

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